What is the point of democracy?

2017-04-092017-04-09 PNRJ cognitive science, core principles, critique of neoclassical economics, public policy Applause Light, autocracy, California, collective action, commitment, corruption, deep state, democracy, Denmark, economic growth, government, inequality, Less Wrong, Luxembourg, Mississippi, oligarchy, republic, Russia, South Korea, Switzerland, taxation, technocracy, Turkey, voting

Apr 9, JDN 2457853

[This topic was chosen by Patreon vote.]

“Democracy” is the sort of word that often becomes just an Applause Light (indeed it was the original example Less Wrong used). Like “freedom” and “liberty” (and for much the same reasons), it’s a good thing, that much we know; but it’s often unclear what is even meant by the word, much less why it should be so important to us.

From another angle, it is strangely common for economists and political scientists to argue that democracy is not all that important; they at least tend to use a precise formal definition of “democracy”, but are oddly quick to dismiss it as pointless or even harmful when it doesn’t line up precisely with their models of an efficient economy or society. I think the best example of this is the so-called “Downs paradox”, where political scientists were so steeped in the tradition of defining all rationality as psychopathic self-interest that they couldn’t even explain why it would occur to anyone to vote. (And indeed, rumor has it that most economists don’t bother to vote, much less campaign politically—which perhaps begins to explain why our economic policy is so terrible.)

Yet especially for Americans in the Trump era, I think it is vital to understand what “democracy” is supposed to mean, and why it is so important.

So, first of all, what is democracy? It is nothing more or less than government by popular vote.

This comes in degrees, of course: The purest direct democracy would have the entire population vote on even the most mundane policies and decisions. You could actually manage something like a monastery or a social club in such a fashion, but this is clearly unworkable on any large scale. Even once you get to hundreds of people, much less thousands or millions, it becomes unviable. The closest example I’ve seen is Switzerland, where there are always numerous popular referenda on ballots that are voted on by entire regions or the entire country—and even then, Switzerland does have representatives that make many of the day-to-day decisions.

So in practice all large-scale democratic systems are some degree of representative democracy, or republic, where some especially decisions may be made by popular vote, but most policies are made by elected representatives, staff appointed by those representatives, or even career civil servants who are appointed in a nominally apolitical process not so different from private-sector hiring. In the most extreme cases such civil servants can become so powerful that you get a deep state, where career bureaucrats exercise more power than elected officials—at that point I think you have actually lost the right to really call yourself a “democracy” and have become something more like a technocracy.
Yet of course a country can get even more undemocratic than that, and many are, governed by an aristocracy or oligarchy that vests power in a small number of wealthy and powerful individuals, or monarchy or autocracy that gives near-absolute power to a single individual.

Thus, there is a continuum of most to least democratic, with popular vote at one end, followed by elected representatives, followed by appointed civil servants, followed by a handful of oligarchs, and ultimately the most undemocratic system is an autocracy controlled by a single individual.

I also think it’s worth mentioning that constitutional monarchies with strong parliamentary systems, like the United Kingdom and Norway, are also “democracies” in the sense I intend. Yes, technically they have these hereditary monarchs—but in practice, the vast majority of the state’s power is vested in the votes of its people. Indeed, if we separate out parliamentary constitutional monarchy from presidential majoritarian democracy and compare them, the former might actually turn out to be better. Certainly, some of the world’s most prosperous nations are governed that way.

As I’ve already acknowledge, the very far extreme of pure direct democracy is unfeasible. But why would we want to get closer to that end? Why be like Switzerland or Denmark rather than like Turkey or Russia—or for that matter why be like California rather than like Mississippi?
Well, if you know anything about the overall welfare of these states, it almost seems obvious—Switzerland and Denmark are richer, happier, safer, healthier, more peaceful, and overall better in almost every way than Turkey and Russia. The gap between California and Mississippi is not as large, but it is larger than most people realize. Median household income in California is $64,500; in Mississippi it is only $40,593. Both are still well within the normal range of a highly-developed country, but that effectively makes California richer than Luxembourg but Mississippi poorer than South Korea. But perhaps the really stark comparison to make is life expectancy: Life expectancy at birth in California is almost 81 years, while in Mississippi it’s only 75.

Of course, there are a lot of other differences between states besides how much of their governance is done by popular referendum. Simply making Mississippi decide more things by popular vote would not turn it into California—much less would making Turkey more democratic turn it into Switzerland. So we shouldn’t attribute these comparisons entirely to differences in democracy. Indeed, a pair of two-way comparisons is only in the barest sense a statistical argument; we should be looking at dozens if not hundreds of comparisons if we really want to see the effects of democracy. And we should of course be trying to control for other factors, adjust for country fixed-effects, and preferably use natural experiments or instrumental variables to tease out causality.

Yet such studies have in fact been done. Stronger degrees of democracy appear to improve long-run economic growth, as well as reduce corruption, increase free trade, protect peace, and even improve air quality.

Subtler analyses have compared majoritarian versus proportional systems (where proportional seems, to me, at least, more democratic), as well as different republican systems with stronger or weaker checks and balances (stronger is clearly better, though whether that is “more democratic” is at least debatable). The effects of democracy on income distribution are more complicated, probably because there have been some highly undemocratic socialist regimes.

So, the common belief that democracy is good seems to be pretty well supported by the data. But why is democracy good? Is it just a practical matter of happening to get better overall results? Could it one day be overturned by some superior system such as technocracy or a benevolent autocratic AI?

Well, I don’t want to rule out the possibility of improving upon existing systems of government. Clearly new systems of government have in fact emerged over the course of history—Greek “democracy” and Roman “republic” were both really aristocracy, and anything close to universal suffrage didn’t really emerge on a large scale until the 20th century. So the 21st (or 22nd) century could well devise a superior form of government we haven’t yet imagined.
However, I do think there is good reason to believe that any new system of government that actually manages to improve upon democracy will still resemble democracy, because there are three key features democracy has that other systems of government simply can’t match. It is these three features that make democracy so important and so worth fighting for.

1. Everyone’s interests are equally represented.

Perhaps no real system actually manages to represent everyone’s interests equally, but the more democratic a system is, the better it will conform to this ideal. A well-designed voting system can aggregate the interests of an entire population and choose the course of action that creates the greatest overall benefit.

Markets can also be a good system for allocating resources, but while markets represent everyone’s interests, they do so highly unequally. Rich people are quite literally weighted more heavily in the sum.

Most systems of government do even worse, by completely silencing the voices of the majority of the population. The notion of a “benevolent autocracy” is really a conceit; what makes you think you could possibly keep the autocrat benevolent?

This is also why any form of disenfranchisement is dangerous and a direct attack upon democracy. Even if people are voting irrationally, against their own interests and yours, by silencing their voice you are undermining the most fundamental tenet of democracy itself. All voices must be heard, no exceptions. That is democracy’s fundamental strength.

2. The system is self-correcting.

This may more accurately describe a constitutional republican system with strong checks and balances, but that is what most well-functioning democracies have and it is what I recommend. If you conceive of “more democracy” as meaning that people can vote their way into fascism by electing a sufficiently charismatic totalitarian, then I do not want us to have “more democracy”. But just as contracts and regulations that protect you can make you in real terms more free because you can now safely do things you otherwise couldn’t risk, I consider strong checks and balances that maintain the stability of a republic against charismatic fascists to be in a deeper sense more democratic. This is ultimately semantic; I think I’ve made it clear enough that I want strong checks and balances.

With such checks and balances in place, democracies may move slower than autocracies; they may spend more time in deliberation or even bitter, polarized conflict. But this also means that their policies do not lurch from one emperor’s whim to another, and they are stable against being overtaken by corruption or fascism. Their policies are stable and predictable; their institutions are strong and resilient.

No other system of government yet devised by humans has this kind of stability, which may be why democracies are gradually taking over the world. Charismatic fascism fails when the charismatic leader dies; hereditary monarchy collapses when the great-grandson of the great king is incompetent; even oligarchy and aristocracy, which have at least some staying power, ultimately fall apart when the downtrodden peasants ultimately revolt. But democracy abides, for where monarchy and aristocracy are made of families and autocracy and fascism are made of a single man, democracy is made of principles and institutions. Democracy is evolutionarily stable, and thus in Darwinian terms we can predict it will eventually prevail.

3. The coercion that government requires is justified.

All government is inherently coercive. Libertarians are not wrong about this. Taxation is coercive. Regulation is coercive. Law is coercive. (The ones who go on to say that all government is “death threats” or “slavery” are bonkers, mind you. But it is in fact coercive.)

The coercion of government is particularly terrible if that coercion is coming from a system like an autocracy, where the will of the people is minimally if at all represented in the decisions of policymakers. Then that is a coercion imposed from outside, a coercion in the fullest sense, one person who imposes their will upon another.

But when government coercion comes from a democracy, it takes on a fundamentally different meaning. Then it is not they who coerce us—it is we who coerce ourselves. Now, why in the world would you coerce yourself? It seems ridiculous, doesn’t it?

Not if you know any game theory. There are in fall all sorts of reasons why one might want to coerce oneself, and two in particular become particularly important for the justification of democratic government.

The first and most important is collective action: There are many situations in which people all working together to accomplish a goal can be beneficial to everyone, but nonetheless any individual person who found a way to shirk their duty and not contribute could benefit even more. Anyone who has done a group project in school with a couple of lazy students in it will know this experience: You end up doing all the work, but they still get a good grade at the end. If everyone had taken the rational, self-interested action of slacking off, everyone in the group would have failed the project.

Now imagine that the group project we’re trying to achieve is, say, defending against an attack by Imperial Japan. We can’t exactly afford to risk that project falling through. So maybe we should actually force people to support it—in the form of taxes, or even perhaps a draft (as ultimately we did in WW2). Then it is no longer rational to try to shirk your duty, so everyone does their duty, the project gets done, and we’re all better off. How do we decide which projects are important enough to justify such coercion? We vote, of course. This is the most fundamental justification of democratic government.

The second that is relevant for government is commitment. There are many circumstances in which we want to accomplish something in the future, and from a long-run perspective it makes sense to achieve that goal—but then when the time comes to take action, we are tempted to procrastinate or change our minds. How can we resolve such a dilemma? Well, one way is to tie our own hands—to coerce ourselves into carrying out the necessary task we are tempted to avoid or delay.

This applies to many types of civil and criminal law, particularly regarding property ownership. Murder is a crime that most people would not commit even if it were completely legal. But shoplifting? I think if most people knew there would be no penalty for petty theft and retail fraud they would be tempted into doing it at least on occasion. I doubt it would be frequent enough to collapse our entire economic system, but it would introduce a lot of inefficiency, and make almost everything more expensive. By having laws in place that punish us for such behavior, we have a way of defusing such temptations, at least for most people most of the time. This is not as important for the basic functioning of government as is collective action, but I think it is still important enough to be worthy of mention.

Of course, there will always be someone who disagrees with any given law, regardless of how sensible and well-founded that law may be. And while in some sense “we all” agreed to pay these taxes, when the IRS actually demands that specific dollar amount from you, it may well be an amount that you would not have chosen if you’d been able to set our entire tax system yourself. But this is a problem of aggregation that I think may be completely intractable; there’s no way to govern by consensus, because human beings just can’t achieve consensus on the scale of millions of people. Governing by popular vote and representation is the best alternative we’ve been able to come up with. If and when someone devises a system of government that solves that problem and represents the public will even better than voting, then we will have a superior alternative to democracy.

Until then, it is as Churchill said: “Democracy is the worst form of government, except for all the others.”

How we sold our privacy piecemeal

2017-04-022017-03-26 PNRJ cognitive science, heuristics and biases, market failure, public policy, Uncategorized ACLU, Big Data, data, data broker, Facebook, Google, just-noticeable difference, preferences, privacy, security, TIME

Apr 2, JDN 2457846

The US Senate just narrowly voted to remove restrictions on the sale of user information by Internet Service Providers. Right now, your ISP can basically sell your information to whomever they like without even telling you. The new rule that the Senate struck down would have required them to at least make you sign a form with some fine print on it, which you probably would sign without reading it. So in practical terms maybe it makes no difference.

…or does it? Maybe that’s really the mistake we’ve been making all along.

In cognitive science we have a concept called the just-noticeable difference (JND); it is basically what it sounds like. If you have two stimuli—two colors, say, or sounds of two different pitches—that differ by an amount smaller than the JND, people will not notice it. But if they differ by more than the JND, people will notice. (In practice it’s a bit more complicated than that, as different people have different JND thresholds and even within a person they can vary from case to case based on attention or other factors. But there’s usually a relatively narrow range of JND values, such that anything below that is noticed by no one and anything above that is noticed by almost everyone.)

The JND seems like an intuitively obvious concept—of course you can’t tell the difference between a color of 432.78 nanometers and 432.79 nanometers!—but it actually has profound implications. In particular it undermines the possibility of having truly transitive preferences. If you prefer some colors to others—which most of us do—but you have a nonzero JND in color wavelengths—as we all do—then I can do the following: Find one color you like (for concreteness, say you like blue of 475 nm), and another color you don’t (say green of 510 nm). Let you choose between the blue you like and another blue, 475.01 nm. Will you prefer one to the other? Of course not, the difference is within your JND. So now compare 475.01 nm and 475.02 nm; which do you prefer? Again, you’re indifferent. And I can go on and on this way a few thousand times, until finally I get to 510 nanometers, the green you didn’t like. I have just found a chain of your preferences that is intransitive; you said A = B = C = D… all the way down the line to X = Y = Z… but then at the end you said A > Z. Your preferences aren’t transitive, and therefore aren’t well-defined rational preferences. And you could do the same to me, so neither are mine.

Part of the reason we’ve so willingly given up our privacy in the last generation or so is our paranoid fear of terrorism, which no doubt triggers deep instincts about tribal warfare. Depressingly, the plurality of Americans think that our government has not gone far enough in its obvious overreaches of the Constitution in the name of defending us from a threat that has killed fewer Americans in my lifetime than die from car accidents each month.

But that doesn’t explain why we—and I do mean we, for I am as guilty as most—have so willingly sold our relationships to Facebook and our schedules to Google. Google isn’t promising to save me from the threat of foreign fanatics; they’re merely offering me a more convenient way to plan my activities. Why, then, am I so cavalier about entrusting them with so much personal data?

Well, I didn’t start by giving them my whole life. I created an email account, which I used on occasion. I tried out their calendar app and used it to remind myself when my classes were. And so on, and so forth, until now Google knows almost as much about me as I know about myself.

At each step, it didn’t feel like I was doing anything of significance; perhaps indeed it was below my JND. Each bit of information I was giving didn’t seem important, and perhaps it wasn’t. But all together, our combined information allows Google to make enormous amounts of money without charging most of its users a cent.

The process goes something like this. Imagine someone offering you a penny in exchange for telling them how many times you made left turns last week. You’d probably take it, right? Who cares how many left turns you made last week? But then they offer another penny in exchange for telling them how many miles you drove on Tuesday. And another penny for telling them the average speed you drive during the afternoon. This process continues hundreds of times, until they’ve finally given you say $5.00—and they know exactly where you live, where you work, and where most of your friends live, because all that information was encoded in the list of driving patterns you gave them, piece by piece.

Consider instead how you’d react if someone had offered, “Tell me where you live and work and I’ll give you $5.00.” You’d be pretty suspicious, wouldn’t you? What are they going to do with that information? And $5.00 really isn’t very much money. Maybe there’s a price at which you’d part with that information to a random suspicious stranger—but it’s probably at least $50 or even more like $500, not $5.00. But by asking it in 500 different questions for a penny each, they can obtain that information from you at a bargain price.

If you work out how much money Facebook and Google make from each user, it’s actually pitiful. Facebook has been increasing their revenue lately, but it’s still less than $20 per user per year. The stranger asks, “Tell me who all your friends are, where you live, where you were born, where you work, and what your political views are, and I’ll give you $20.” Do you take that deal? Apparently, we do. Polls find that most Americans are willing to exchange privacy for valuable services, often quite cheaply.

Of course, there isn’t actually an alternative social network that doesn’t sell data and instead just charges a subscription fee. I don’t think this is a fundamentally unfeasible business model, but it hasn’t succeeded so far, and it will have an uphill battle for two reasons.

The first is the obvious one: It would have to compete with Facebook and Google, who already have the enormous advantage of a built-in user base of hundreds of millions of people.

The second one is what this post is about: The social network based on conventional economics rather than selling people’s privacy can’t take advantage of the JND.

I suppose they could try—charge $0.01 per month at first, then after awhile raise it to $0.02, $0.03 and so on until they’re charging $2.00 per month and actually making a profit—but that would be much harder to pull off, and it would provide the least revenue when it is needed most, at the early phase when the up-front costs of establishing a network are highest. Moreover, people would still feel that; it’s a good feature of our monetary system that you can’t break money into small enough denominations to really consistently hide under the JND. But information can be broken down into very tiny pieces indeed. Much of the revenue earned by these corporate giants is actually based upon indexing the keywords of the text we write; we literally sell off our privacy word by word.

What should we do about this? Honestly, I’m not sure. Facebook and Google do in fact provide valuable services, without which we would be worse off. I would be willing to pay them their $20 per year, if I could ensure that they’d stop selling my secrets to advertisers. But as long as their current business model keeps working, they have little incentive to change. There is in fact a huge industry of data brokering, corporations you’ve probably never heard of that make their revenue entirely from selling your secrets.

In a rare moment of actual journalism, TIME ran an article about a year ago arguing that we need new government policy to protect us from this kind of predation of our privacy. But they had little to offer in the way of concrete proposals.

The ACLU does better: They have specific proposals for regulations that should be made to protect our information from the most harmful prying eyes. But as we can see, the current administration has no particular interest in pursuing such policies—if anything they seem to do the opposite.

Tax plan possibilities

2017-03-262017-03-26 PNRJ core principles, current events, public policy Barack Obama, basic income, budget, deduction, Donald Trump, healthcare, income, income tax, Laffer Curve, logtax, Medicaid, Medicare, metarate, military budget, Ronald Reagan, single-payer, tax code, tax reform, taxation, taxes

Mar 26, JDN 2457839

Recently President Trump (that phrase may never quite feel right) began presenting his new tax plan. To be honest, it’s not as ridiculous as I had imagined it might be. I mean, it’s still not very good, but it’s probably better than Reagan’s tax plan his last year in office, and it’s not nearly as absurd as the half-baked plan Trump originally proposed during the campaign.

But it got me thinking about the incredible untapped potential of our tax system—the things we could achieve as a nation, if we were willing to really commit to them and raise taxes accordingly.

A few years back I proposed a progressive tax system based upon logarithmic utility. I now have a catchy name for that tax proposal; I call it the logtax. It depends on two parameters—a poverty level, at which the tax rate goes to zero; and what I like to call a metarate—the fundamental rate that sets all the actual tax rates by the formula.

For the poverty level, I suggest we use the highest 2-household poverty level set by the Department of Health and Human Services: Because of Alaska’s high prices, that’s the Alaska poverty level, and the resulting figure is $20,290—let’s round to $20,000.

I would actually prefer to calculate taxes on an individual basis—I see no reason to incentivize particular household arrangements—but as current taxes are calculated on a household basis, I’m going to use that for now.

The metarate can be varied, and in the plans below I will compare different options for the metarate.

I will compare six different tax plans:

Our existing tax plan, set under the Obama administration
Trump’s proposed tax plan
A flat rate of 30% with a basic income of $12,000, replacing welfare programs and Medicaid
A flat rate of 40% with a basic income of $15,000, replacing welfare programs and Medicaid
A logtax with a metarate of 20%, all spending intact
A logtax with a metarate of 25% and a basic income of $12,000, replacing welfare programs and Medicaid
A logtax with a metarate of 35% and a basic income of $15,000, cutting military spending by 50% and expanding Medicare to the entire population while eliminating Medicare payroll taxes

To do a proper comparison, I need estimates of the income distribution in the United States, in order to properly estimate the revenue from each type of tax. For that I used US Census data for most of the income data, supplementing with the World Top Incomes database for the very highest income brackets. The household data is broken up into brackets of $5,000 and only goes up to $250,000, so it’s a rough approximation to use the average household income for each bracket, but it’s all I’ve got.

The current brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. These are actually marginal rates, not average rates, which makes the calculation a lot more complicated. I did it properly though; for example, when you start paying the marginal rate of 28%, your average rate is really only 20.4%.

Worst of all, I used static scoring—that is, I ignored the Laffer Effect by which increasing taxes changes incentives and can change pre-tax incomes. To really do this analysis properly, one should use dynamic scoring, taking these effects into account—but proper dynamic scoring is an enormous undertaking, and this is a blog post, not my dissertation.

Still, I was able to get pretty close to the true figures. The actual federal budget shows total revenue net of payroll taxes to be $2.397 trillion, whereas I estimated $2.326 trillion; the true deficit is $608 billion and I estimated $682 billion.

Under Trump’s tax plan, almost all rates are cut. He also plans to remove some deductions, but all reports I could find on the plan were vague as to which ones, and with data this coarse it’s very hard to get any good figures on deduction amounts anyway. I also want to give him credit where it’s due: It was a lot easier to calculate the tax rates under Trump’s plan (but still harder than under mine…). But in general what I found was the following:

Almost everyone pays less income tax under Trump’s plan, by generally about 4-5% of their income. The poor benefit less or are slightly harmed; the rich benefit a bit more.

For example, a household in poverty making $12,300 would pay $1,384 currently, but $1,478 under Trump’s plan, losing $94 or 0.8% of their income. An average household making $52,000 would pay $8,768 currently but only $6,238 under Trump’s plan, saving $2,530 or about 4.8% of their income. A household making $152,000 would pay $35,580 currently but only $28,235 under Trump’s plan, saving $7,345 or again about 4.8%. A top 1% household making $781,000 would pay $265,625 currently, but only $230,158 under Trump’s plan, saving $35,467 or about 4.5%. A top 0.1% household making $2,037,000 would pay $762,656 currently, but only $644,350 under Trump’s plan, saving $118,306 or 5.8% of their income. A top 0.01% household making $9,936,000 would pay $3,890,736 currently, but only $3,251,083 under Trump’s plan, saving $639,653 or 6.4% of their income.

Because taxes are cut across the board, Trump’s plan would raise less revenue. My static scoring will exaggerate this effect, but only moderately; my estimate says we would lose over $470 billion in annual revenue, while the true figure might be $300 billion. In any case, Trump will definitely increase the deficit substantially unless he finds a way to cut an awful lot of spending elsewhere—and his pet $54 billion increase to the military isn’t helping in that regard. My estimate of the new deficit under Trump’s plan is $1.155 trillion—definitely not the sort of deficit you should be running during a peacetime economic expansion.

Let’s see what we might have done instead.

If we value simplicity and ease of calculation, it’s hard to beat a flat tax plus basic income. With a flat tax of 30% and a basic income of $12,000 per household, the poor do much better off because of the basic income, while the rich do a little better because of the flat tax, and the middle class feels about the same because the two effects largely cancel. Calculating your tax liability now couldn’t be easier; multiply your income by 3, remove a zero—that’s what you owe in taxes. And how much do you get in basic income? The same as everyone else, $12,000.

Using the same comparison households: The poor household making $12,300 would now receive $8,305—increasing their income by $9,689 or 78.8% relative to the current system. The middle-class household making $52,000 would pay $3,596, saving $5,172 or 10% of their income. The upper-middle-class household making $152,000 would now pay $33,582, saving only $1998 or 1.3% of their income. The top 1% household making $782,000 would pay $234,461, saving $31,164 or 4.0%. The top 0.1% household making $2,037,000 would pay $611,000, saving $151,656 or 7.4%. Finally, the top 0.01% household making $9,936,000 would pay $2,980,757, saving $910,000 or 9.1%.

Thus, like Trump’s plan, the tax cut almost across the board results in less revenue. However, because of the basic income, we can now justify cutting a lot of spending on social welfare programs. I estimated we could reasonably save about $630 billion by cutting Medicaid and other social welfare programs, while still not making poor people worse off because of the basic income. The resulting estimated deficit comes in at $1.085 trillion, which is still too large—but less than what Trump is proposing.

If I raise the flat rate to 40%—just as easy to calculate—I can bring that deficit down, even if I raise the basic income to $15,000 to compensate. The poverty household now receives $10,073, and the other representative households pay $5,974; $45,776; $297,615; $799,666; and $3,959,343 respectively. This means that the poor are again much better off, the middle class are about the same, and the rich are now substantially worse off. But what’s our deficit now? $180 billion—that’s about 1% of GDP, the sort of thing you can maintain indefinitely with a strong currency.

Can we do better than this? I think we can, with my logtax.

I confess that the logtax is not quite as easy to calculate as the flat tax. It does require taking exponents, and you can’t do it in your head. But it’s actually still easier than the current system, because there are no brackets to keep track of, no discontinuous shifts in the marginal rate. It is continuously progressive for all incomes, and the same formula can be used for all incomes from zero to infinity.
The simplest plan just replaces the income tax with a logtax of 20%. The poor household now receives $1,254, just from the automatic calculation of the tax—no basic income was added. The middle-class household pays $9,041, slightly more than what they are currently paying. Above that, people start paying more for sure: $50,655; $406,076; $1,228,795; and $7,065,274 respectively.

This system is obviously more progressive, but does it raise sufficient revenue? Why, as a matter of fact it removes the deficit entirely. The model estimates that the budget would now be at surplus of $110 billion. This is probably too optimistic; under dynamic scoring the distortions are probably going to cut the revenue a little. But it would almost certainly reduce the deficit, and very likely eliminate it altogether—without any changes in spending.

The next logtax plan adds a basic income of $12,000. To cover this, I raised the metarate to 25%. Now the poor household is receiving $11,413, the middle-class household is paying a mere $1,115, and the other households are paying $50,144; $458,140; $1,384,475; and $7,819,932 respectively. That top 0.01% household isn’t going to be happy, as they are now paying 78% of their income where in our current system they would pay only 39%. But their after-tax income is still over $2 million.

How does the budget look now? As with the flat tax plan, we can save about $630 billion by cutting redundant social welfare programs. So we are once again looking at a surplus, this time of about $63 billion. Again, the dynamic scoring might show some deficit, but definitely not a large one.

Finally, what if I raise the basic income to $15,000 and raise the metarate to 35%? The poor household now receives $14,186, while the median household pays $2,383. The richer households of course foot the bill, paying $64,180; $551,031; $1,618,703; and $8,790,124 respectively. Oh no, the top 0.01% household will have to make do with only $1.2 million; how will they survive!?

This raises enough revenue that it allows me to do some even more exciting things. With a $15,000 basic income, I can eliminate social welfare programs for sure. But then I can also cut military spending, say in half—still leaving us the largest military in the world. I can move funds around to give Medicare to every single American, an additional cost of about twice what we currently pay for Medicare. Then Medicaid doesn’t just get cut; it can be eliminated entirely, folded into Medicare. Assuming that the net effect on total spending is zero, the resulting deficit is estimated at only $168 billion, well within the range of what can be sustained indefinitely.

And really, that’s only the start. Once you consider all the savings on healthcare spending—an average of $4000 per person per year, if switching to single-payer brings us down to the average of other highly-developed countries. This is more than what the majority of the population would be paying in taxes under this plan—meaning that once you include the healthcare benefits, the majority of Americans would net receive money from the government. Compared to our current system, everyone making under about $80,000 would be better off. That is what we could be doing right now—free healthcare for everyone, a balanced budget (or close enough), and the majority of Americans receiving more from the government than they pay in taxes.

These results are summarized in the table below. (I also added several more rows of representative households—though still not all the brackets I used!) I’ve color-coded who would be paying less in tax in green and who would be more in tax in red under each plan, compared to our current system. This color-coding is overly generous to Trump’s plan and the 30% flat tax plan, because it doesn’t account for the increased government deficit (though I did color-code those as well, again relative to the current system). And yet, over 50% of households make less than $51,986, putting the poorest half of Americans in the green zone for every plan except Trump’s. For the last plan, I also color-coded those between $52,000 and $82,000 who would pay additional taxes, but less than they save on healthcare, thus net saving money in blue. Including those folks, we’re benefiting over 69% of Americans.

Household pre-tax income	Current tax system	Trump’s tax plan	Flat 30% tax with $12k basic income	Flat 40% tax with $15k basic income	Logtax 20%	Logtax 25% with $12k basic income	Logtax 35% with $15k basic income, single-payer healthcare
$1,080	$108	$130	-$11,676	-$14,568	-$856	-$12,121	-$15,173
$12,317	$1,384	$1,478	-$8,305	-$10,073	-$1,254	-$11,413	-$14,186
$22,162	$2,861	$2,659	-$5,351	-$6,135	$450	-$9,224	-$11,213
$32,058	$4,345	$3,847	-$2,383	-$2,177	$2,887	-$6,256	-$7,258
$51,986	$8,768	$6,238	$3,596	$5,794	$9,041	$1,115	$2,383
$77,023	$15,027	$9,506	$11,107	$15,809	$18,206	$11,995	$16,350
$81,966	$16,263	$10,742	$12,590	$17,786	$20,148	$14,292	$17,786
$97,161	$20,242	$14,540	$17,148	$23,864	$26,334	$21,594	$28,516
$101,921	$21,575	$15,730	$18,576	$27,875	$30,571	$23,947	$31,482
$151,940	$35,580	$28,235	$33,582	$45,776	$50,655	$50,144	$64,180
$781,538	$265,625	$230,158	$222,461	$297,615	$406,076	$458,140	$551,031
$2,036,666	$762,656	$644,350	$599,000	$799,666	$1,228,795	$1,384,475	$1,618,703
$9,935,858	$3,890,736	$3,251,083	$2,968,757	$3,959,343	$7,065,274	$7,819,932	$8,790,124
Change in federal spending	$0	$0	-$630 billion	-$630 billion	$0	-$630 billion	$0
Estimated federal surplus	-$682 billion	-$1,155 billion	-$822 billion	-$180 billion	$110 billion	$63 billion	-$168 billion

Information theory proves that multiple-choice is stupid

2017-03-192017-03-20 PNRJ cognitive science, education, public policy answer splicing, anxiety, automation, bit, byte, College Board, education, evaluation, exam, information, learning, multiple-choice, SAT, Shannon entropy, teaching, test

Mar 19, JDN 2457832

This post is a bit of a departure from my usual topics, but it’s something that has bothered me for a long time, and I think it fits broadly into the scope of uniting economics with the broader realm of human knowledge.

Multiple-choice questions are inherently and objectively poor methods of assessing learning.

Consider the following question, which is adapted from actual tests I have been required to administer and grade as a teaching assistant (that is, the style of question is the same; I’ve changed the details so that it wouldn’t be possible to just memorize the response—though in a moment I’ll get to why all this paranoia about students seeing test questions beforehand would also be defused if we stopped using multiple-choice):

The demand for apples follows the equation Q = 100 – 5 P.
The supply of apples follows the equation Q = 10 P.
If a tax of $2 per apple is imposed, what is the equilibrium price, quantity, tax revenue, consumer surplus, and producer surplus?

A. Price = $5, Quantity = 10, Tax revenue = $50, Consumer Surplus = $360, Producer Surplus = $100

B. Price = $6, Quantity = 20, Tax revenue = $40, Consumer Surplus = $200, Producer Surplus = $300

C. Price = $6, Quantity = 60, Tax revenue = $120, Consumer Surplus = $360, Producer Surplus = $300

D. Price = $5, Quantity = 60, Tax revenue = $120, Consumer Surplus = $280, Producer Surplus = $500

You could try solving this properly, setting supply equal to demand, adjusting for the tax, finding the equilibrium, and calculating the surplus, but don’t bother. If I were tutoring a student in preparing for this test, I’d tell them not to bother. You can get the right answer in only two steps, because of the multiple-choice format.

Step 1: Does tax revenue equal $2 times quantity? We said the tax was $2 per apple.
So that rules out everything except C and D. Welp, quantity must be 60 then.

Step 2: Is quantity 10 times price as the supply curve says? For C they are, for D they aren’t; guess it must be C then.

Now, to do that, you need to have at least a basic understanding of the economics underlying the question (How is tax revenue calculated? What does the supply curve equation mean?). But there’s an even easier technique you can use that doesn’t even require that; it’s called Answer Splicing.

Here’s how it works: You look for repeated values in the answer choices, and you choose the one that has the most repeated values. Prices $5 and $6 are repeated equally, so that’s not helpful (maybe the test designer planned at least that far). Quantity 60 is repeated, other quantities aren’t, so it’s probably that. Likewise with tax revenue $120. Consumer surplus $360 and Producer Surplus $300 are both repeated, so those are probably it. Oh, look, we’ve selected a unique answer choice C, the correct answer!

You could have done answer splicing even if the question were about 18th century German philosophy, or even if the question were written in Arabic or Japanese. In fact you even do it if it were written in a cipher, as long as the cipher was a consistent substitution cipher.

Could the question have been designed to better avoid answer splicing? Probably. But this is actually quite difficult to do, because there is a fundamental tradeoff between two types of “distractors” (as they are known in the test design industry). You want the answer choices to contain correct pieces and resemble the true answer, so that students who basically understand the question but make a mistake in the process still get it wrong. But you also want the answer choices to be distinct enough in a random enough pattern that answer splicing is unreliable. These two goals are inherently contradictory, and the result will always be a compromise between them. Professional test-designers usually lean pretty heavily against answer-splicing, which I think is probably optimal so far as it goes; but I’ve seen many a professor err too far on the side of similar choices and end up making answer splicing quite effective.

But of course, all of this could be completely avoided if I had just presented the question as an open-ended free-response. Then you’d actually have to write down the equations, show me some algebra solving them, and then interpret your results in a coherent way to answer the question I asked. What’s more, if you made a minor mistake somewhere (carried a minus sign over wrong, forgot to divide by 2 when calculating the area of the consumer surplus triangle), I can take off a few points for that error, rather than all the points just because you didn’t get the right answer. At the other extreme, if you just randomly guess, your odds of getting the right answer are miniscule, but even if you did—or copied from someone else—if you don’t show me the algebra you won’t get credit.

So the free-response question is telling me a lot more about what the student actually knows, in a much more reliable way, that is much harder to cheat or strategize against.

Moreover, this isn’t a matter of opinion. This is a theorem of information theory.

The information that is carried over a message channel can be quantitatively measured as its Shannon entropy. It is usually measured in bits, which you may already be familiar with as a unit of data storage and transmission rate in computers—and yes, those are all fundamentally the same thing. A proper formal treatment of information theory would be way too complicated for this blog, but the basic concepts are fairly straightforward: think in terms of how long a sequence of 1s and 0s it would take to convey the message. That is, roughly speaking, the Shannon entropy of that message.

How many bits are conveyed by a multiple-choice response with four choices? 2. Always. At maximum. No exceptions. It is fundamentally, provably, mathematically impossible to convey more than 2 bits of information via a channel that only has 4 possible states. Any multiple-choice response—any multiple-choice response—of four choices can be reduced to the sequence 00, 01, 10, 11.

True-false questions are a bit worse—literally, they convey 1 bit instead of 2. It’s possible to fully encode the entire response to a true-false question as simply 0 or 1.

For comparison, how many bits can I get from the free-response question? Well, in principle the answer to any mathematical question has the cardinality of the real numbers, which is infinite (in some sense beyond infinite, in fact—more infinite than mere “ordinary” infinity); but in reality you can only write down a small number of possible symbols on a page. I can’t actually write down the infinite diversity of numbers between 3.14159 and the true value of pi; in 10 digits or less, I can only (“only”) write down a few billion of them. So let’s suppose that handwritten text has about the same information density as typing, which in ASCII or Unicode has 8 bits—one byte—per character. If the response to this free-response question is 300 characters (note that this paragraph itself is over 800 characters), then the total number of bits conveyed is about 2400.

That is to say, one free-response question conveys six hundred times as much information as a multiple-choice question. Of course, a lot of that information is redundant; there are many possible correct ways to write the answer to a problem (if the answer is 1.5 you could say 3/2 or 6/4 or 1.500, etc.), and many problems have multiple valid approaches to them, and it’s often safe to skip certain steps of algebra when they are very basic, and so on. But it’s really not at all unrealistic to say that I am getting between 10 and 100 times as much useful information about a student from reading one free response than I would from one multiple-choice question.

Indeed, it’s actually a bigger difference than it appears, because when evaluating a student’s performance I’m not actually interested in the information density of the message itself; I’m interested in the product of that information density and its correlation with the true latent variable I’m trying to measure, namely the student’s actual understanding of the content. (A sequence of 500 random symbols would have a very high information density, but would be quite useless in evaluating a student!) Free-response questions aren’t just more information, they are also better information, because they are closer to the real-world problems we are training for, harder to cheat, harder to strategize, nearly impossible to guess, and provided detailed feedback about exactly what the student is struggling with (for instance, maybe they could solve the equilibrium just fine, but got hung up on calculating the consumer surplus).

As I alluded to earlier, free-response questions would also remove most of the danger of students seeing your tests beforehand. If they saw it beforehand, learned how to solve it, memorized the steps, and then were able to carry them out on the test… well, that’s actually pretty close to what you were trying to teach them. It would be better for them to learn a whole class of related problems and then be able to solve any problem from that broader class—but the first step in learning to solve a whole class of problems is in fact learning to solve one problem from that class. Just change a few details each year so that the questions aren’t identical, and you will find that any student who tried to “cheat” by seeing last year’s exam would inadvertently be studying properly for this year’s exam. And then perhaps we could stop making students literally sign nondisclosure agreements when they take college entrance exams. Listen to this Orwellian line from the SAT nondisclosure agreement:

Misconduct includes,but is not limited to:

•Taking any test questions or essay topics from the testing room, including through memorization, giving them to anyone else, or discussing them with anyone else through anymeans, including, but not limited to, email, text messages or the Internet

Including through memorization. You are not allowed to memorize SAT questions, because God forbid you actually learn something when we are here to make money off evaluating you.

Multiple-choice tests fail in another way as well; by definition they cannot possibly test generation or recall of knowledge, they can only test recognition. You don’t need to come up with an answer; you know for a fact that the correct answer must be in front of you, and all you need to do is recognize it. Recall and recognition are fundamentally different memory processes, and recall is both more difficult and more important.

Indeed, the real mystery here is why we use multiple-choice exams at all.
There are a few types of very basic questions where multiple-choice is forgivable, because there are just aren’t that many possible valid answers. If I ask whether demand for apples has increased, you can pretty much say “it increased”, “it decreased”, “it stayed the same”, or “it’s impossible to determine”. So a multiple-choice format isn’t losing too much in such a case. But most really interesting and meaningful questions aren’t going to work in this format.

I don’t think it’s even particularly controversial among educators that multiple-choice questions are awful. (Though I do recall an “educational training” seminar a few weeks back that was basically an apologia for multiple choice, claiming that it is totally possible to test “higher-order cognitive skills” using multiple-choice, for reals, believe me.) So why do we still keep using them?

Well, the obvious reason is grading time. The one thing multiple-choice does have over a true free response is that it can be graded efficiently and reliably by machines, which really does make a big difference when you have 300 students in a class. But there are a couple reasons why even this isn’t a sufficient argument.

First of all, why do we have classes that big? It’s absurd. At that point you should just email the students video lectures. You’ve already foreclosed any possibility of genuine student-teacher interaction, so why are you bothering with having an actual teacher? It seems to be that universities have tried to work out what is the absolute maximum rent they can extract by structuring a class so that it is just good enough that students won’t revolt against the tuition, but they can still spend as little as possible by hiring only one adjunct or lecturer when they should have been paying 10 professors.

And don’t tell me they can’t afford to spend more on faculty—first of all, supporting faculty is why you exist. If you can’t afford to spend enough providing the primary service that you exist as an institution to provide, then you don’t deserve to exist as an institution. Moreover, they clearly can afford it—they simply prefer to spend on hiring more and more administrators and raising the pay of athletic coaches. PhD comics visualized it quite well; the average pay for administrators is three times that of even tenured faculty, and athletic coaches make ten times as much as faculty. (And here I think the mean is the relevant figure, as the mean income is what can be redistributed. Firing one administrator making $300,000 does actually free up enough to hire three faculty making $100,000 or ten grad students making $30,000.)

But even supposing that the institutional incentives here are just too strong, and we will continue to have ludicrously-huge lecture classes into the foreseeable future, there are still alternatives to multiple-choice testing.

Ironically, the College Board appears to have stumbled upon one themselves! About half the SAT math exam is organized into a format where instead of bubbling in one circle to give your 2 bits of answer, you bubble in numbers and symbols corresponding to a more complicated mathematical answer, such as entering “3/4” as “0”, “3”, “/”, “4” or “1.28” as “1”, “.”, “2”, “8”. This could easily be generalized to things like “e^2” as “e”, “^”, “2” and “sin(3pi/2)” as “sin”, “3” “pi”, “/”, “2”. There are 12 possible symbols currently allowed by the SAT, and each response is up to 4 characters, so we have already increased our possible responses from 4 to over 20,000—which is to say from 2 bits to 14. If we generalize it to include symbols like “pi” and “e” and “sin”, and allow a few more characters per response, we could easily get it over 20 bits—10 times as much information as a multiple-choice question.

But we can do better still! Even if we insist upon automation, high-end text-recognition software (of the sort any university could surely afford) is now getting to the point where it could realistically recognize a properly-formatted algebraic formula, so you’d at least know if the student remembered the formula correctly. Sentences could be transcribed into typed text, checked for grammar, and sorted for keywords—which is not nearly as good as a proper reading by an expert professor, but is still orders of magnitude better than filling circle “C”. Eventually AI will make even more detailed grading possible, though at that point we may have AIs just taking over the whole process of teaching. (Leaving professors entirely for research, presumably. Not sure if this would be good or bad.)

Automation isn’t the only answer either. You could hire more graders and teaching assistants—say one for every 30 or 40 students instead of one for every 100 students. (And then the TAs might actually be able to get to know their students! What a concept!) You could give fewer tests, or shorter ones—because a small, reliable sample is actually better than a large, unreliable one. A bonus there would be reducing students’ feelings of test anxiety. You could give project-based assignments, which would still take a long time to grade, but would also be a lot more interesting and fulfilling for both the students and the graders.

Or, and perhaps this is the most radical answer of all: You could stop worrying so much about evaluating student performance.

I get it, you want to know whether students are doing well, both so that you can improve your teaching and so that you can rank the students and decide who deserves various awards and merits. But do you really need to be constantly evaluating everything that students do? Did it ever occur to you that perhaps that is why so many students suffer from anxiety—because they are literally being formally evaluated with long-term consequences every single day they go to school?

If we eased up on all this evaluation, I think the fear is that students would just detach entirely; all teachers know students who only seem to show up in class because they’re being graded on attendance. But there are a couple of reasons to think that maybe this fear isn’t so well-founded after all.

If you give up on constant evaluation, you can open up opportunities to make your classes a lot more creative and interesting—and even fun. You can make students want to come to class, because they get to engage in creative exploration and collaboration instead of memorizing what you drone on at them for hours on end. Most of the reason we don’t do creative, exploratory activities is simply that we don’t know how to evaluate them reliably—so what if we just stopped worrying about that?

Moreover, are those students who only show up for the grade really getting anything out of it anyway? Maybe it would be better if they didn’t show up—indeed, if they just dropped out of college entirely and did something else with their lives until they get their heads on straight. Maybe all this effort that we are currently expending trying to force students to learn who clearly don’t appreciate the value of learning could instead be spent enriching the students who do appreciate learning and came here to do as much of it as possible. Because, ultimately, you can lead a student to algebra, but you can’t make them think. (Let me be clear, I do not mean students with less innate ability or prior preparation; I mean students who aren’t interested in learning and are only showing up because they feel compelled to. I admire students with less innate ability who nonetheless succeed because they work their butts off, and wish I were quite so motivated myself.)
There’s a downside to that, of course. Compulsory education does actually seem to have significant benefits in making people into better citizens. Maybe if we let those students just leave college, they’d never come back, and they would squander their potential. Maybe we need to force them to show up until something clicks in their brains and they finally realize why we’re doing it. In fact, we’re really not forcing them; they could drop out in most cases and simply don’t, probably because their parents are forcing them. Maybe the signaling problem is too fundamental, and the only way we can get unmotivated students to accept not getting prestigious degrees is by going through this whole process of forcing them to show up for years and evaluating everything they do until we can formally justify ultimately failing them. (Of course, almost by construction, a student who does the absolute bare minimum to pass will pass.) But college admission is competitive, and I can’t shake this feeling there are thousands of students out there who got rejected from the school they most wanted to go to, the school they were really passionate about and willing to commit their lives to, because some other student got in ahead of them—and that other student is now sitting in the back of the room playing with an iPhone, grumbling about having to show up for class every day. What about that squandered potential? Perhaps competitive admission and compulsory attendance just don’t mix, and we should stop compelling students once they get their high school diploma.

Intellectual Property, revisited

2017-03-112017-03-11 PNRJ core principles, development economics, public policy copyleft, copyright, development, econometrics, intellectual property, law, liberty, patent, property, research and development, trade policy, trademark

Mar 12, JDN 2457825

A few weeks ago I wrote a post laying out the burden of proof for intellectual property, but didn’t have time to get into the empirical question of whether our existing intellectual property system can meet this burden of proof.

First of all, I want to make a very sharp distinction between three types of regulations that are all called “intellectual property”.

First there are trademarks, which I have absolutely no quarrel with. Avoiding fraud and ensuring transparency are fundamental functions without which markets would unravel, and without trademarks these things would be much harder to accomplish. Trademarks allow a company to establish a brand identity that others cannot usurp; they ensure that when you buy Coca-Cola (R) it is really in fact the beverage you expect and not some counterfeit knockoff. (And if counterfeit Coke sounds silly, note that counterfeit honey and maple syrup are actually a major problem.) Yes, there should be limits on how much you can trademark—no one wants to live in a world where you feel Love ™ and open Screen Doors ™—but in fact our courts are already fairly good about only allowing corporations to trademark newly-coined words and proper names for their products.

Next there are copyrights, which I believe are currently too strong and often abused, but I do think should exist in some form (or perhaps copylefts instead). Authors should have at least certain basic rights over how their work can be used and published. If nothing else, proper attribution should always be required, as without that plagiarism becomes intolerably easy. And steps should be taken to ensure that if any people profit from its sale, the author is among them. I publish this blog under a by-sa copyleft, which essentially means that you can share it with whomever you like and even adapt its content into your own work, so long as you properly attribute it to me and you do not attempt to claim ownership over it. For scientific content, I think only a copyleft of this sort makes sense—the era of for-profit journals with paywalls must end, as it is holding back our civilization. But for artistic content (and I mean art in the broadest sense, including books, music, movies, plays, and video games), stronger regulations might well make sense. The question is whether our current system is actually too strong, or is protecting the wrong people—often it seems to protect the corporations that sell the content rather than the artists who created it.

Finally there are patents. Unlike copyright which applies to a specific work of art, patent is meant to apply to the underlying concept of a technology. Copyright (or rather the by-sa copyleft) protects the text of this article; you can’t post it on your own blog and claim you wrote it. But if I were to patent it somehow (generally, verbal arguments cannot be patented, fortunately), you wouldn’t even be able to paraphrase it. The trademark on a Samsung ™ TV just means that if I make a TV I can’t say I am Samsung, because I’m not. You wouldn’t copyright a TV, but the analogous process would be if I were to copy every single detail of the television and try to sell that precise duplicate. But the patents on that TV mean that if I take it apart, study each component, find a way to build them all from my own raw materials, even make them better, and build a new TV out of them that looks different and performs better—I would still be infringing on intellectual property. Patents grant an extremely strong notion of property rights, one which actually undermines a lot of other, more basic concepts of property. It’s my TV, why can’t I take it apart and copy the components? Well, as long as the patent holds, it’s not entirely my TV. Property rights this strong—that allow a corporation to have its cake of selling the TV but eat it too by owning the rights to all its components—require a much stronger justification.

Trademark protects a name, which is unproblematic. Copyright protects a work, which carries risks but is still probably necessary in many cases. But patent protects an idea—and we should ask ourselves whether that is really something it makes sense to do.

In previous posts I’ve laid out some of the basic philosophical arguments for why patents do not seem to support innovation and may actually undermine it. But in this post I want to do something more direct and quantitative: Empirically, what is the actual effect of copyrights and patents on innovation? Can we find a way to quantify the costs and benefits to our society of different modes of intellectual property?

Economists quantify things all the time, so I briefly combed the literature to see what sort of empirical studies had been done on the economic impact of copyrights and patents.

Patents definitely create barriers to scientific collaboration: Scientific articles with ideas that don’t get patented are about 10-20% more likely to be cited than scientific articles with ideas that are patented. (I would have expected a larger effect, but that’s still not trivial.)

A 1995 study found that creased patent protections do seem to be positively associated with more trade.

A 2009 study of Great Britain published in AER found it “puzzling” that stronger patents actually seem to reduce the rate of innovation domestically, while having no effect on foreign innovation—yet this is exactly what I would have predicted. Foreign innovations should be largely unaffected by UK patents, but stricter patent laws in the UK make it harder for most actual innovators, only benefiting a handful of corporations that aren’t even particularly innovative.

This 1996 study did find a positive effect of stronger patent laws on economic growth, but it was quite small and only statistically significant when using instrumental variables that they couldn’t be bothered to define except in an appendix. When your result hinges on the use of instrumental variables that you haven’t even clearly defined in the paper, something is very fishy. My guess is that they p-hacked the instruments until they got the result they wanted.

This other 1996 study is a great example of why economists need to listen to psychologists. It found a negative correlation between foreign direct investment and—wait for it—the number of companies that answered “yes” to a survey question, “Does country X have intellectual property protection too weak to allow you to transfer your newest or most effective technology to a wholly-owned subsidiarythere?” Oh, wow, you found a correlation between foreign direct investment and a question directly asking about foreign direct investment.

his 2004 study found a nonlinear relationship whereby increased economic development affects intellectual property rights, rather than the other way around. But I find their theoretical model quite odd, and the scatter plot that lies at the core of their empirical argument reminds me of Rexthor, the Dog-Bearer. “This relationship appears to be non-linear,” they say when pointing at a scatter plot that looks mostly like nothing and maybe like a monotonic increase.

This 1997 study found a positive correlation between intellectual property strength, R&D spending, and economic growth. The effect is weak, but the study looks basically sound. (Though I must say I’d never heard anyone use the words “significant at the 24% level” before. Normally one would say “nonsignificant” for that variable methinks. It’s okay for it not to be significant in some of your regressions, you know.)

This 1992 paper found that intellectual property harms poor countries and may or may not benefit rich countries, but it uses a really weird idiosyncratic theoretical model to get there. Frankly if I see the word “theorem” anywhere in your empirical paper, I get suspicious. No, it is not a theorem that “For economies in steady state the South loses from tighter intellectual property rights.” It may be true, but it does not follow from the fundamental axioms of mathematics.

This law paper is excellent; it focuses on the fact that intellectual property is a unique arrangement and a significant deviation from conventional property rights. It tracks the rise of legal arguments that erroneously equate intellectual property with real property, and makes the vital point that fully internalizing the positive externalities of technology was never the goal, and would in fact be horrible should it come to pass. We would all have to pay most of our income in royalties to the Newton and Faraday estates. So, I highly recommend reading it. But it doesn’t contain any empirical results on the economic effects of intellectual property.

This is the best paper I was able to find showing empirical effects of different intellectual property regimes; I really have no complaints about its econometrics. But it was limited to post-Soviet economies shortly after the fall of the USSR, which were rather unique circumstances. (Indeed, by studying only those countries, you’d probably conclude that free markets are harmful, because the shock of transition was so great.)

This 1999 paper is also quite good; using a natural experiment from a sudden shift in Japanese patent policy, they found almost no difference in actual R&D. The natural experiment design makes this particularly credible, but it’s difficult to generalize since it only covered Japan specifically.

This study focused in particular on copyrights and the film industry, and found a nonlinear effect: While having no copyright protection at all was harmful to the film industry, making the copyright protections too strong had a strangling effect on new filmmakers entering the industry. This would suggest that the optimal amount of copyright is moderate, which sounds reasonable to me.

This 2009 study did a much more detailed comparison of different copyright regimes, and was unable to find a meaningful pattern amidst the noise. Indeed, they found that the only variable that consistently predicted the number of new works of art was population—more people means more art, and nothing else seemed to matter. If this is correct, it’s quite damning to copyright; it would suggest that people make art for reasons fundamentally orthogonal to copyright, and copyright does almost nothing useful. (And I must say, if you talk to most artists, that tends to be their opinion on the matter!)

This 1996 paper found that stronger patents had no benefits for poor countries, but benefited rich countries quite a large amount: Increased patent protection was estimated to add as much as 0.7% annual GDP growth over the whole period. That’s a lot; if this is really true, stronger patents are almost certainly worth it. But then it becomes difficult to explain why more precise studies haven’t found effects anywhere near that large.

This paper was pretty interesting; they found a fat-tailed distribution of patents, where most firms have none, many have one or a few, and a handful of firms have a huge number of patents. This is also consistent with the distribution of firm revenue and profit—and I’d be surprised if I didn’t find a strong correlation between all three. But this really doesn’t tell us whether patents are contributing to innovation.
This paper found that the harmonization of global patents in the Uruguay Round did lead to gains from trade for most countries, but also transferred about $4.5 billion to the US from the rest of the world. Of course, that’s really not that large an amount when we’re talking about global policy over several years.

What does all that mean? I don’t know. It’s a mess. There just don’t seem to be any really compelling empirical studies on the economic impact of copyrights and patents. The preponderance of the evidence, such as it is, would seem to suggest that copyrights provide a benefit as long as they aren’t too strong, while patents provide a benefit but it is quite small and likely offset by the rent-seeking of the corporations that own them. The few studies that found really large effects (like 0.7% annual GDP growth) don’t seem very credible to me; if the effect were really that large, it shouldn’t be so ambiguous. 0.7% per year over 25 years is a GDP 20% larger. Over 50 years, GDP would be 42% larger. We would be able to see that.

Does this ambiguity mean we should do nothing, and wait until the data is better? I don’t think so. Remember, the burden of proof for intellectual property should be high. It’s a fundamentally bizarre notion of property, one which runs against most of our standard concepts of real property; it restricts our rights in very basic ways, making literally the majority of our population into criminals. Such a draconian policy requires a very strong justification, but such a justification does not appear to be forthcoming. If it could be supported, that 0.7% GDP growth might be enough; but it doesn’t seem to be replicable. A free society does not criminalize activities just in case it might be beneficial to do so—it only criminalizes activities that have demonstrable harm. And the harm of copyright and patent infringement simply isn’t demonstrable enough to justify its criminalization.

We don’t have to remove them outright, but we should substantially weaken copyright and patent laws. They should be short-term, they should provide very basic protection, and they should never be owned by corporations, always by individuals (corporations should be able to license them—but not own them). If we then observe a substantial reduction in innovation and economic output, then we can put them back. But I think that what defenders of intellectual property fear most is that if we tried this, it wouldn’t be so bad—and then the “doom and gloom” justification they’ve been relying on all this time would fall apart.

Games as economic simulations—and education tools

2017-03-052017-02-28 PNRJ cognitive science, development economics, futurism, macroeconomics art, education, EVE Online, experiment, fiction, games, Moore's Law, Pigovian tax, research, Shakespeare, technology, video games

Mar 5, JDN 2457818 [Sun]

Moore’s Law is a truly astonishing phenomenon. Now as we are well into the 21st century (I’ve lived more of my life in the 21st century than the 20th now!) it may finally be slowing down a little bit, but it has had quite a run, and even this could be a temporary slowdown due to economic conditions or the lull before a new paradigm (quantum computing?) matures. Since at least 1975, the computing power of an individual processor has doubled approximately every year and a half; that means it has doubled over 25 times—or in other words that it has increased by a factor of over 30 million. I now have in my pocket a smartphone with several thousand times the processing speed of the guidance computer of the Saturn V that landed on the Moon.

This meteoric increase in computing power has had an enormous impact on the way science is done, including economics. Simple theoretical models that could be solved by hand are now being replaced by enormous simulation models that have to be processed by computers. It is now commonplace to devise models with systems of dozens of nonlinear equations that are literally impossible to solve analytically, and just solve them iteratively with computer software.

But one application of this technology that I believe is currently underutilized is video games.

As a culture, we still have the impression that video games are for children; even games like Dragon Age and Grand Theft Auto that are explicitly for adults (and really quite inappropriate for children!) are viewed as in some sense “childish”—that no serious adult would be involved with such frivolities. The same cultural critics who treat Shakespeare’s vagina jokes as the highest form of art are liable to dismiss the poignant critique of war in Call of Duty: Black Ops or the reflections on cultural diversity in Skyrim as mere puerility.

But video games are an art form with a fundamentally greater potential than any other. Now that graphics are almost photorealistic, there is really nothing you can do in a play or a film that you can’t do in a video game—and there is so, so much more that you can only do in a game.
In what other medium can we witness the spontaneous emergence and costly aftermath of a war? Yet EVE Online has this sort of event every year or so—just today there was a surprise attack involving hundreds of players that destroyed thousands of hours’—and dollars’—worth of starships, something that has more or less become an annual tradition. A few years ago there was a massive three-faction war that destroyed over $300,000 in ships and has now been commemorated as “the Bloodbath of B-R5RB”.
Indeed, the immersion and interactivity of games present an opportunity to do nothing less than experimental macroeconomics. For generations it has been impossible, or at least absurdly unethical, to ever experimentally manipulate an entire macroeconomy. But in a video game like EVE Online or Second Life, we can now do so easily, cheaply, and with little or no long-term harm to the participants—and we can literally control everything in the experiment. Forget the natural resource constraints and currency exchange rates—we can change the laws of physics if we want. (Indeed, EVE‘s whole trade network is built around FTL jump points, and in Second Life it’s a basic part of the interface that everyone can fly like Superman.)

This provides untold potential for economic research. With sufficient funding, we could build a game that would allow us to directly test hypotheses about the most fundamental questions of economics: How do governments emerge and maintain security? How is the rule of law sustained, and when can it be broken? What controls the value of money and the rate of inflation? What is the fundamental cause of unemployment, and how can it be corrected? What influences the rate of technological development? How can we maximize the rate of economic growth? What effect does redistribution of wealth have on employment and output? I envision a future where we can directly simulate these questions with thousands of eager participants, varying the subtlest of parameters and carrying out events over any timescale we like from seconds to centuries.

Nor is the potential of games in economics limited to research; it also has enormous untapped potential in education. I’ve already seen in my classes how tabletop-style games with poker chips can teach a concept better in a few minutes than hours of writing algebra derivations on the board; but custom-built video games could be made that would teach economics far better still, and to a much wider audience. In a well-designed game, people could really feel the effects of free trade or protectionism, not just on themselves as individuals but on entire nations that they control—watch their GDP numbers go down as they scramble to produce in autarky what they could have bought for half the price if not for the tariffs. They could see, in real time, how in the absence of environmental regulations and Pigovian taxes the actions of millions of individuals could despoil our planet for everyone.

Of course, games are fundamentally works of fiction, subject to the Fictional Evidence Fallacy and only as reliable as their authors make them. But so it is with all forms of art. I have no illusions about the fact that we will never get the majority of the population to regularly read peer-reviewed empirical papers. But perhaps if we are clever enough in the games we offer them to play, we can still convey some of the knowledge that those papers contain. We could also update and expand the games as new information comes in. Instead of complaining that our students are spending time playing games on their phones and tablets, we could actually make education into games that are as interesting and entertaining as the ones they would have been playing. We could work with the technology instead of against it. And in a world where more people have access to a smartphone than to a toilet, we could finally bring high-quality education to the underdeveloped world quickly and cheaply.

Rapid growth in computing power has given us a gift of great potential. But soon our capacity will widen even further. Even if Moore’s Law slows down, computing power will continue to increase for awhile yet. Soon enough, virtual reality will finally take off and we’ll have even greater depth of immersion available. The future is bright—if we can avoid this corporatist cyberpunk dystopia we seem to be hurtling toward, of course.

Markets value rich people more

2017-02-262017-10-08 PNRJ core principles, critique of neoclassical economics, inequality Bill Gates, inequality, Malawi, marginal utility, redistribution, utility, wealth

Feb 26, JDN 2457811

Competitive markets are optimal at maximizing utility, as long as you value rich people more.

That is literally a theorem in neoclassical economics. I had previously thought that this was something most economists didn’t realize; I had delusions of grandeur that maybe I could finally convince them that this is the case. But no, it turns out this is actually a well-known finding; it’s just that somehow nobody seems to care. Or if they do care, they never talk about it. For all the thousands of papers and articles about the distortions created by minimum wage and capital gains tax, you’d think someone could spare the time to talk about the vastly larger fundamental distortions created by the structure of the market itself.

It’s not as if this is something completely hopeless we could never deal with. A basic income would go a long way toward correcting this distortion, especially if coupled with highly progressive taxes. By creating a hard floor and a soft ceiling on income, you can reduce the inequality that makes these distortions so large.

The basics of the theorem are quite straightforward, so I think it’s worth explaining them here. It’s extremely general; it applies anywhere that goods are allocated by market prices and different individuals have wildly different amounts of wealth.

Suppose that each person has a certain amount of wealth W to spend. Person 1 has W1, person 2 has W2, and so on. They all have some amount of happiness, defined by a utility function, which I’ll assume is only dependent on wealth; this is a massive oversimplification of course, but it wouldn’t substantially change my conclusions to include other factors—it would just make everything more complicated. (In fact, including altruistic motives would make the whole argument stronger, not weaker.) Thus I can write each person’s utility as a function U(W). The rate of change of this utility as wealth increases, the marginal utility of wealth, is denoted U'(W).

By the law of diminishing marginal utility, the marginal utility of wealth U'(W) is decreasing. That is, the more wealth you have, the less each new dollar is worth to you.

Now suppose people are buying goods. Each good C provides some amount of marginal utility U'(C) to the person who buys it. This can vary across individuals; some people like Pepsi, others Coke. This marginal utility is also decreasing; a house is worth a lot more to you if you are living in the street than if you already have a mansion. Ideally we would want the goods to go to the people who want them the most—but as you’ll see in a moment, markets systematically fail to do this.

If people are making their purchases rationally, each person’s willingness-to-pay P for a given good C will be equal to their marginal utility of that good, divided by their marginal utility of wealth:

P = U'(C)/U'(W)

Now consider this from the perspective of society as a whole. If you wanted to maximize utility, you’d equalize marginal utility across individuals (by the Extreme Value Theorem). The idea is that if marginal utility is higher for one person, you should give that person more, because the benefit of what you give them will be larger that way; and if marginal utility is lower for another person, you should give that person less, because the benefit of what you give them will be smaller. When everyone is equal, you are at the maximum.

But market prices don’t actually do this. Instead they equalize over willingness-to-pay. So if you’ve got two individuals 1 and 2, instead of having this:

U'(C1) = U'(C2)

you have this:

P1 = P2

which translates to:

U'(C1)/U'(W1) = U'(C2)/U'(W2)

If the marginal utilities were the same, U'(W1) = U'(W2), we’d be fine; these would give the same results. But that would only happen if W1 = W2, that is, if the two individuals had the same amount of wealth.

Now suppose we were instead maximizing weighted utility, where each person gets a weighting factor A based on how “important” they are or something. If your A is higher, your utility matters more. If we maximized this new weighted utility, we would end up like this:

A1*U'(C1) = A2*U'(C2)

Because person 1’s utility counts for more, their marginal utility also counts for more. This seems very strange; why are we valuing some people more than others? On what grounds?

Yet this is effectively what we’ve already done by using market prices.
Just set:
A = 1/U'(W)

Since marginal utility of wealth is decreasing, 1/U'(W) is higher precisely when W is higher.

How much higher? Well, that depends on the utility function. The two utility functions I find most plausible are logarithmic and harmonic. (Actually I think both apply, one to other-directed spending and the other to self-directed spending.)

If utility is logarithmic:

U = ln(W)

Then marginal utility is inversely proportional:

U'(W) = 1/W

In that case, your value as a human being, as spoken by the One True Market, is precisely equal to your wealth:

A = 1/U'(W) = W

If utility is harmonic, matters are even more severe.

U(W) = 1-1/W

Marginal utility goes as the inverse square of wealth:

U'(W) = 1/W^2

And thus your value, according to the market, is equal to the square of your wealth:

A = 1/U'(W) = W^2

What are we really saying here? Hopefully no one actually believes that Bill Gates is really morally worth 400 trillion times as much as a starving child in Malawi, as the calculation from harmonic utility would imply. (Bill Gates himself certainly doesn’t!) Even the logarithmic utility estimate saying that he’s worth 20 million times as much is pretty hard to believe.

But implicitly, the market “believes” that, because when it decides how to allocate resources, something that is worth 1 microQALY to Bill Gates (about the value a nickel dropped on the floor to you or I) but worth 20 QALY (twenty years of life!) to the Malawian child, will in either case be priced at $8,000, and since the child doesn’t have $8,000, it will probably go to Mr. Gates. Perhaps a middle-class American could purchase it, provided it was worth some 0.3 QALY to them.

Now consider that this is happening in every transaction, for every good, in every market. Goods are not being sold to the people who get the most value out of them; they are being sold to the people who have the most money.

And suddenly, the entire edifice of “market efficiency” comes crashing down like a house of cards. A global market that quite efficiently maximizes willingness-to-pay is so thoroughly out of whack when it comes to actually maximizing utility that massive redistribution of wealth could enormously increase human welfare, even if it turned out to cut our total output in half—if utility is harmonic, even if it cut our total output to one-tenth its current value.

The only way to escape this is to argue that marginal utility of wealth is not decreasing, or at least decreasing very, very slowly. Suppose for instance that utility goes as the 0.9 power of wealth:

U(W) = W^0.9

Then marginal utility goes as the -0.1 power of wealth:

U'(W) = 0.9 W^(-0.1)

On this scale, Bill Gates is only worth about 5 times as much as the Malawian child, which in his particular case might actually be too small—if a trolley is about to kill either Bill Gates or 5 Malawian children, I think I save Bill Gates, because he’ll go on to save many more than 5 Malawian children. (Of course, substitute Donald Trump or Charles Koch and I’d let the trolley run over him without a second thought if even a single child is at stake, so it’s not actually a function of wealth.) In any case, a 5 to 1 range across the whole range of human wealth is really not that big a deal. It would introduce some distortions, but not enough to justify any redistribution that would meaningfully reduce overall output.

Of course, that commits you to saying that $1 to a Malawian child is only worth about $1.50 to you or I and $5 to Bill Gates. If you can truly believe this, then perhaps you can sleep at night accepting the outcomes of neoclassical economics. But can you, really, believe that? If you had the choice between an intervention that would give $100 to each of 10,000 children in Malawi, and another that would give $50,000 to each of 100 billionaires, would you really choose the billionaires? Do you really think that the world would be better off if you did?

We don’t have precise measurements of marginal utility of wealth, unfortunately. At the moment, I think logarithmic utility is the safest assumption; it’s about the slowest decrease that is consistent with the data we have and it is very intuitive and mathematically tractable. Perhaps I’m wrong and the decrease is even slower than that, say W^(-0.5) (then the market only values billionaires as worth thousands of times as much as starving children). But there’s no way you can go as far as it would take to justify our current distribution of wealth. W^(-0.1) is simply not a plausible value.

And this means that free markets, left to their own devices, will systematically fail to maximize human welfare. We need redistribution—a lot of redistribution. Don’t take my word for it; the math says so.

Caught between nepotism and credentialism

2017-02-192017-02-12 PNRJ market failure, public policy college, credential, Donald Trump, education, gender pay gap, George W. Bush, Ivy League, nepotism, Rogart-Reinhoff, sociology

Feb 19, JDN 2457804

One of the more legitimate criticisms out there of we “urban elites” is our credentialism—our tendency to decide a person’s value as an employee or even as a human being based solely upon their formal credentials. Randall Collins, an American sociologist, wrote a book called The Credential Society arguing that much of the class stratification in the United States is traceable to this credentialism—upper-middle-class White Anglo-Saxon Protestants go to the good high schools to get into the good colleges to get the good careers, and all along the way maintain subtle but significant barriers to keep everyone else out.

A related concern is that of credential inflation, where more and more people get a given credential (such as a high school diploma or a college degree), and it begins to lose value as a signal of status. It is often noted that a bachelor’s degree today “gets” you the same jobs that a high school diploma did two generations ago, and two generations hence you may need a master’s or even a PhD.

I consider this concern wildly overblown, however. First of all, they’re not actually the same jobs at all. Even our “menial” jobs of today require skills that most people didn’t have two generations ago—not simply those involving electronics and computers, but even quite basic literacy and numeracy. Yes, you could be a banker in the 1920s with a high school diploma, but plenty of bankers in the 1920s didn’t know algebra. What, you think they were arbitraging derivatives based on the Black-Scholes model?

The primary purpose of education should be to actually improve students’ abilities, not to signal their superior status. More people getting educated is good, not bad. If we really do need signals, we can devise better ones than making people pay tens of thousands of dollars in tuition and spending years taking classes. An expenditure of that magnitude should be accomplishing something, not just signaling. (And given the overwhelming positive correlation between a country’s educational attainment and its economic development, clearly education is actually accomplishing something.) Our higher educational standards have directly tied to higher technology and higher productivity. If indeed you need a PhD to be a janitor in 2050, it will be because in 2050 a “janitor” is actually the expert artificial intelligence engineer who commands an army of cleaning robots, not because credentials have “inflated”. Thinking that credentials “inflate” requires thinking that business managers must be very stupid, that they would exclude whole swaths of qualified candidates that they could pay less to do the same work. Only a complete moron would require a PhD to hire you for wielding a mop.

No, what concerns me is an over-emphasis on prestigious credentials over genuine competence. This is definitely a real issue in our society: Almost every US President went to an Ivy League university, yet several of them (George W. Bush, anyone?) clearly would not actually have been selected by such a university if their families had not been wealthy and well-connected. (Harvard’s application literally contains a question asking whether you are a “lineal or collateral descendant” of one of a handful of super-wealthy families.) Papers that contain errors so basic that I would probably get a failing grade as a grad student for them become internationally influential because they were written by famous economists with fancy degrees.

Ironically, it may be precisely because elite universities try not to give grades or special honors that so many of their students try so desperately to latch onto any bits of social status they can get their hands on. In this blog post, a former Yale law student comments on how, without grades or cum laude to define themselves, Yale students became fiercely competitive in the pettiest ways imaginable. Or it might just be a selection effect; to get into Yale you’ve probably got to be pretty competitive, so even if they don’t give out grades once you get there, you can take the student out of the honors track, but you can’t take the honors track out of the student.

But perhaps the biggest problem with credentialism is… I don’t see any viable alternatives!

We have to decide who is going to be hired for technical and professional positions somehow. It almost certainly can’t be everyone. And the most sensible way to do it would be to have a process people go through to get trained and evaluated on their skills in that profession—that is, a credential.

What else would we do? We could decide randomly, I suppose; well, good luck with that. Or we could try to pick people who don’t have qualifications (“anti-credentialism” I suppose), which would be systematically wrong. Or individual employers could hire individuals they know and trust on a personal level, which doesn’t seem quite so ridiculous—but we have a name for that too, and it’s nepotism.

Even anti-credentialism does exist, bafflingly enough. Many people voted for George W. Bush because they said he was “the kind of guy you can have a beer with”. That wasn’t true, of course; he was the spoiled child of a billionaire, a man who had never really worked a day in his life. But even if it had been true, so what? How is that a qualification to be the leader of the free world? And how many people voted for Trump precisely because he had no experience in government? This made sense to them somehow. (And, shockingly, he has no idea what he’s doing. Actually what is shocking is that he admits that.)

Nepotism of course happens all the time. In fact, nepotism is probably the default state for humans. The continual re-emergence of hereditary monarchy and feudalism around the world suggests that this is some sort of attractor state for human societies, that in the absence of strong institutional pressures toward some other system this is what people will generally settle into. And feudalism is nothing if not nepotistic; your position in life is almost entirely determined by your father’s position, and his father’s before that.

Formal credentials can put a stop to that. Of course, your ability to obtain the credential often depends upon your income and social status. But if you can get past those barriers and actually get the credential, you now have a way of pushing past at least some of the competitors who would have otherwise been hired on their family connections alone. The rise in college enrollments—and women actually now exceeding men in college enrollment rates—is one of the biggest reasons why the gender pay gap is rapidly closing among young workers. Nepotism and sexism that would otherwise have hired unqualified men is now overtaken by the superior credentials of qualified women.

Credentialism does still seem suboptimal… but from where I’m sitting, it seems like a second-best solution. We can’t actually observe people’s competence and ability directly, so we need credentials to provide an approximate measurement. We can certainly work to improve credentials—and for example, I am fiercely opposed to multiple-choice testing because it produces such meaningless credentials—but ultimately I don’t see any alternative to credentials.

Is intellectual property justified?

2017-02-122017-02-05 PNRJ ethics, market failure, public policy copyright, cost-benefit analysis, F-35, innovation, patent, winner takes all

Feb 12, JDN 2457797

I had hoped to make this week’s post more comprehensive, but as I’ve spent the last week suffering from viral bronchitis I think I will keep this one short and revisit the topic in a few weeks.

Intellectual property underlies an increasingly large proportion of the world’s economic activity, more so now than ever before. We don’t just patent machines anymore; we patent drugs, and software programs, and even plants. Compared to that, copyrights on books, music, and movies seem downright pedestrian.

Though surely not the only cause, this is almost certainly contributing to the winner-takes-all effect; if you own the patent to something important, you can appropriate a huge amount of wealth to yourself with very little effort.

Moreover, this is not something that happened automatically as a natural result of market forces or autonomous human behavior. This is a policy, one that requires large investments in surveillance and enforcement to maintain. Intellectual property is probably the single largest market intervention that our government makes, and it is in a very strange direction: With antitrust law, the government seeks to undermine monopolies; but with intellectual property, the government seeks to protect monopolies.

So it’s important to ask: What is the justification for intellectual property? Do we actually have a good reason for doing this?

The basic argument goes something like this:

Many intellectual endeavors, such as research, invention, and the creation of art, require a large up-front investment of resources to complete, but once completed it costs almost nothing to disseminate the results. There is a very large fixed cost that makes it difficult to create these goods at all, but once they exist, the marginal cost of producing more of them is minimal.

If we didn’t have any intellectual property, once someone created an invention or a work of art, someone else could simply copy it and sell it at a much lower price. If enough competition emerged to drive price down to marginal cost, the original creator of the good would not only not profit, but would actually take an enormous loss, as they paid that large fixed cost but none of their competitors did.

Thus, knowing that they will take a loss if they do, individuals will not create inventions or works of art in the first place. Without intellectual property, all research, invention, and art would grind to a halt.

That last sentence sounds terrible, right? What would we do without research, invention, or art? But then if you stop and think about it for a minute, it becomes clear that this can’t possibly be the outcome of eliminating intellectual property. Most societies throughout the history of human civilization have not had a system of intellectual property, and yet they have all had art, and most of them have had research and invention as well.

If intellectual property is to be defended, it can’t be because we would have none of these things without it—it must be that we would have less, and so much less that it offsets the obvious harms of concentrating so much wealth and power in a handful of individuals.

I had hoped to get into the empirical results of different intellectual property regimes, but due to my illness I’m going to save that for another day.

Instead I’m just going to try to articulate what the burden of proof here really needs to be.

First of all, showing that we spend a lot of money on patents contributes absolutely nothing useful to defending them. Yes, we all know patents are expensive. The question is whether they are worth it. To show that this is not a strawman, here’s an article by IP Watchdog that takes the fact that “a new study showing that academic patent licensing contributed more than $1 trillion to the U.S. economy over eighteen years” is some kind of knockdown argument in favor of patents. If you actually showed that this economic activity would not exist without patents, then that would be an argument for patents. But all this study actually does is shows that we spend that much on patents, which says nothing about whether this is a good use of resources. It’s like when people try to defend the F-35 boondoggle by saying “it supports thousands of jobs!”; well, yes, but what about the millions of jobs we could be supporting instead if we used that money for something more efficient? (And indeed, the evidence is quite clear that spending on the F-35 destroys more jobs than it creates.) So any serious of estimate of economic benefits of intellectual property must also come with an estimate of the economic cost of intellectual property, or it is just propaganda.
It’s not enough to show some non-negligible (much less “statistically significant”) increase in innovation as a result of intellectual property. The effect size is critical; the increase in innovation needs to be large enough that it justifies having world-spanning monopolies that concentrate the world’s wealth in the hands of a few individuals. Because we already know that intellectual property concentrates wealth; they are monopolies, and monopolies concentrate wealth. It’s not enough to show that there is a benefit; that benefit must be greater than the cost, and there must be no alternative methods that allow us to achieve a greater net benefit.
It’s also important to be clear what we mean by “innovation”; this can be a very difficult thing to measure. But in principle what we really want to know is whether we are supporting important innovation—whether we will get more Mona Lisas and more polio vaccines, not simply whether we will get more Twilight and more Viagra. And one of the key problems with intellectual property as a method of funding innovation is that there is only a vague link between the profits that can be extracted and the benefits of the innovation. (Though to be fair, this is actually a more general problem; it is literally a mathematical theorem that competitive markets only maximize utility if you value rich people more, in inverse proportion to their marginal utility of wealth.)

Innovation is certainly important. Indeed, it is no exaggeration to say that innovation is the foundation of economic development and civilization itself. Defenders of intellectual property often want you to stop the conversation there: “Innovation is important!” Don’t let them. It’s not enough to say that innovation is important; intellectual property must also be the best way of achieving that innovation.

Is it? Well, in a few weeks I’ll get back to what the data actually says on this. There is some evidence supporting intellectual property—but the case is a lot weaker than you have probably been led to believe.

The urban-rural divide runs deep

2017-02-052017-01-29 PNRJ cognitive science, public policy Donald Trump, education, Electoral College, income, population, poverty, resentment, rural, scarcity mindset, work

Feb 5, JDN 2457790

Are urban people worth less than rural people?

That probably sounds like a ridiculous thing to ask; of course not, all people are worth the same (other things equal of course—philanthropists are worth more than serial murderers). But then, if you agree with that, you’re probably an urban person, as I’m sure most of my readers are (and as indeed most people in highly-developed countries are).

A disturbing number of rural people, however, honestly do seem to believe this. They think that our urban lifestyles (whatever they imagine those to be) devalue us as citizens and human beings.

That is the key subtext to understand in the terrifying phenomenon that is Donald Trump. Most of the people who voted for him can’t possibly have thought he was actually trustworthy, and many probably didn’t actually support his policies of bigotry and authoritarianism (though he was very popular among bigots and authoritarians). From speaking with family members and acquaintances who proudly voted for Trump, one thing came through very clearly: This was a gigantic middle finger pointed at cities. They didn’t even really want Trump; they just knew we didn’t, and so they voted for him out of spite as much as anything else. They also have really confused views about free trade, so some of them voted for him because he promised to bring back jobs lost to trade (that weren’t lost to trade, can’t be brought back, and shouldn’t be even if they could). Talk with a Trump voter for a few minutes, and sneers of “latte-sipping liberal” (I don’t even like coffee) and “coastal elite” (I moved here to get educated; I wasn’t born here) are sure to follow.

There has always been some conflict between rural and urban cultures, for as long as there have been urban cultures for rural cultures to be in conflict with. It is found not just in the US, but in most if not all countries around the world. It was relatively calm during the postwar boom in the 20th century, as incomes everywhere (or at least everywhere within highly-developed countries) were improving more or less in lockstep. But the 21st century has brought us much more unequal growth, concentrated on particular groups of people and particular industries. This has brought more resentment. And that divide, above all else, is what brought us Trump; the correlation between population density and voting behavior is enormous.

Of course, “urban” is sometimes a dog-whistle for “Black”; but sometimes I think it actually really means “urban”—and yet there’s still a lot of hatred embedded in it. Indeed, perhaps that’s why the dog-whistle works; a White man from a rural town can sneer at “urban” people and it’s not entirely clear whether he’s being racist or just being anti-urban.

The assumption that rural lifestyles are superior runs so deep in our culture that even in articles by urban people (like this one from the LA Times) supposedly reflecting about how to resolve this divide, there are long paeans to the world of “hard work” and “sacrifice” and “autonomy” of rural life, and mocking “urban elites” for their “disproportionate” (by which you can only mean almost proportionate) power over government.

Well, guess what? If you want to live in a rural area, go live in a rural area. Don’t pine for it. Don’t tell me how great farm life is. If you want to live on a farm, go live on a farm. I have nothing against it; we need farmers, after all. I just want you to shut up about how great it is, especially if you’re not going to actually do it. Pining for someone else’s lifestyle when you could easily take on that lifestyle if you really wanted it just shows that you think the grass is greener on the other side.

Because the truth is, farm living isn’t so great for most people. The world’s poorest people are almost all farmers. 70% of people below the UN poverty line live in rural areas, even as more and more of the world’s population moves into cities. If you use a broader poverty measure, as many as 85% of the world’s poor live in rural areas.

The kind of “autonomy” that means defending your home with a shotgun is normally what we would call anarchy—it’s a society that has no governance, no security. (Of course, in the US that’s pure illusion; crime rates in general are low and falling, and lower in rural areas than urban areas. But in some parts of the world, that anarchy is very real.) One of the central goals of global economic development is to get people away from subsistence farming into far more efficient manufacturing and service jobs.

At least in the US, farm life is a lot better than it used to be, now that agricultural technology has improved so that one farmer can now do the work of hundreds. Despite increased population and increased food consumption per person, the number of farmers in the US is now the smallest it has been since before the Civil War. The share of employment devoted to agriculture has fallen from over 80% in 1800 to under 2% today. Even just since the 1960s labor productivity of US farms has more than tripled.

But the reason that some 80% of Americans have chosen to live in cities—and yes, I can clearly say “chosen”, because cities are more expensive and therefore urban living is a voluntary activity. Most people who live in the city right now could move to the country if we really wanted to. We choose not to, because we know our life would be worse if we did.

Indeed, I dare say that a lot of the hatred of city-dwellers has got to be envy. Our (median) incomes are higher and our (mean) lifespans are longer. Fewer of our children are in poverty. Life is better here—we know it, and deep down, they know it too.

We also have better Internet access, unsurprisingly—though rural areas are only a few years behind, and the technology improves so rapidly that twice as many rural homes in the US have Internet access than urban homes did in 1998.

Now, a rational solution to this problem would be either to improve the lives of people in rural areas or else move everyone to urban areas—and both of those things have been happening, not only in the US but around the world. But in order to do that, you need to be willing to change things. You have to give up the illusion that farm life is some wonderful thing we should all be emulating, rather than the necessary toil that humanity was forced to go through for centuries until civilization could advance beyond it. You have to be willing to replace farmers with robots, so that people who would have been farmers can go do something better with their lives. You need to give up the illusion that there is something noble or honorable about hard labor on a farm—indeed, you need to give up the illusion that there is anything noble or honorable about hard work in general. Work is not a benefit; work is a cost. Work is what we do because we have to—and when we no longer have to do it, we should stop. Wanting to escape toil and suffering doesn’t make you lazy or selfish—it makes you rational.

We could surely be more welcoming—but cities are obviously more welcoming to newcomers than rural areas are. Our housing is too expensive, but that’s in part because so many people want to live here—supply hasn’t been able to keep up with demand.

I may seem to be presenting this issue as one-sided; don’t urban people devalue rural people too? Sometimes. Insults like “hick” and “yokel” and “redneck” do of course exist. But I’ve never heard anyone from a city seriously argue that people who live in rural areas should have votes that systematically count for less than those of people who live in cities—yet the reverse is literally what people are saying when they defend the Electoral College. If you honestly think that the Electoral College deserves to exist in anything like its present form, you must believe that some Americans are worth more than others, and the people who are worth more are almost all in rural areas while the people who are worth less are almost all in urban areas.

No, National Review, the Electoral College doesn’t “save” America from California’s imperial power; it gives imperial power to a handful of swing states. The only reason California would be more important than any other state is that more Americans live here. Indeed, a lot of Republicans in California are disenfranchised, because they know that their votes will never overcome the overwhelming Democratic majority for the state as a whole and the system is winner-takes-all. Indeed, about 30% of California votes Republican (well, not in the last election, because that was Trump—Orange County went Democrat for the first time in decades), so the number of disenfranchised Republicans alone in California is larger than the population of Michigan, which in turn is larger than the population of Wyoming, North Dakota, South Dakota, Montana, Nebraska, West Virginia, and Kansas combined. Indeed, there are more people in California than there are in Canada. So yeah, I’m thinking maybe we should get a lot of votes?

But it’s easy for you to drum up fear over “imperial rule” by California in particular, because we’re so liberal—and so urban, indeed an astonishing 95% urban, the most of any US state (or frankly probably any major regional entity on the planet Earth! To beat that you have to be something like Singapore, which literally just is a single city).

In fact, while insults thrown at urban people get thrown at basically all of us regardless of what we do, most of the insults that are thrown at rural people are mainly thrown at uneducated rural people. (And statistically, while many people in rural areas are educated and many people in urban areas are not, there’s definitely a positive correlation between urbanization and education.) It’s still unfair in many ways, not least because education isn’t entirely a choice, not in a society where tuition at an average private university costs more than the median individual income. Many of the people we mock as being stupid were really just born poor. It may not be their fault, but they can’t believe that the Earth is only 10,000 years old and not have some substantial failings in their education. I still don’t think mockery is the right answer; it’s really kicking them while they’re down. But clearly there is something wrong with our society when 40% of people believe something so obviously ludicrous—and those beliefs are very much concentrated in the same Southern states that have the most rural populations. “They think we’re ignorant just because we believe that God made the Earth 6,000 years ago!” I mean… yes? I’m gonna have to own up to that one, I guess. I do in fact think that people who believe things that were disproven centuries ago are ignorant.

So really this issue is one-sided. We who live in cities are being systematically degraded and disenfranchised, and when we challenge that system we are accused of being selfish or elitist or worse. We are told that our lifestyles are inferior and shameful, and when we speak out about the positive qualities of our lives—our education, our acceptance of diversity, our flexibility in the face of change—we are again accused of elitism and condescension.

We could simply stew in that resentment. But we can do better. We can reach out to people in rural areas, show them not just that our lives are better—as I said, they already know this—but that they can have these lives too. And we can make policy so that this really can happen for people. Envy doesn’t automatically lead to resentment; that only happens when combined with a lack of mobility. The way urban people pine for the countryside is baffling, since we could go there any time; but the way that country people long for the city is perfectly understandable, as our lives really are better but our rent is too high for them to afford. We need to bring that rent down, not just for the people already living in cities, but also for the people who want to but can’t.

And of course we don’t want to move everyone to cities, either. Many people won’t want to live in cities, and we need a certain population of farmers to make our food after all. We can work to improve infrastructure in rural areas—particularly when it comes to hospitals, which are a basic necessity that is increasingly underfunded. We shouldn’t stop using cost-effectiveness calculations, but we need to compare against the right things. If that hospital isn’t worth building, it should be because there’s another, better hospital we could make for the same amount or cheaper—not because we think that this town doesn’t deserve to have a hospital. We can expand our public transit systems over a wider area, and improve their transit speeds so that people can more easily travel to the city from further away.

We should seriously face up to the costs that free trade has imposed upon many rural areas. We can’t give up on free trade—but that doesn’t mean we need to keep our trade policy exactly as it is. We can do more to ensure that multinational corporations don’t have overwhelming bargaining power against workers and small businesses. We can establish a tax system that would redistribute more of the gains from free trade to the people and places most hurt by the transition. Right now, poor people in the US are often the most fiercely opposed to redistribution of wealth, because somehow they perceive that wealth will be redistributed from them when it would in fact be redistributed to them. They are in a scarcity mindset, their whole worldview shaped by the fact that they struggle to get by. They see every change as a threat, every stranger as an enemy.

Somehow we need to fight that mindset, get them to see that there are many positive changes that can be made, many things that we can achieve together that none of us could achieve along.

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Human Economics

Cognitive development economics: Understanding the mind in order to feed the world